Internal Revenue Service v. Pransky

March 30, 2001

INTERNAL REVENUE SERVICE, APPELLANTS,v.ROGER PRANSKY, APPELLEE.

The opinion of the court was delivered by: Brown, District Judge

FOR PUBLICATION

OPINION

This matter comes before the Court upon the appeal of the Internal Revenue Service from the Order of the United States Bankruptcy Court for the District of New Jersey ("Bankruptcy Court") issued by the Honorable William H. Gindin, U.S.B.J., March 17, 2000. This Court exercises appellate jurisdiction pursuant to 28 U.S.C. § 158(a). The Court having considered the submissions of the parties and having heard oral argument, finds that the Bankruptcy Court lacked jurisdiction to adjudicate Roger Pransky's complaint as it relates to the 1984 and 1985 tax years, and affirms the Bankruptcy Court's holding as to its determination that the debtor's remittances for 1986 and 1987 constituted deposits and not payments. The Court will vacate the March 17, 2000 Order of the Bankruptcy Court and remand this matter to the Bankruptcy Court for a final determination of the debtor's estate.

I. BACKGROUND

Appellee, Roger Pransky, ("Pransky" or "debtor"), filed a bankruptcy petition pursuant to Chapter 11 of the United States Bankruptcy Code on January 15, 1997. See Pransky v. Internal Revenue Service, 245 B.R. 478, 480 (D.N.J. 1999). In response to plaintiff's petition, the Internal Revenue Service ("IRS" or "government") filed a timely proof of claim on February 27, 1997, in the amount of $131,237.02. See id. at 481. The debtor and the IRS filed motions for summary judgment on the issue of whether the Bankruptcy Court had jurisdiction to determine the legality of the tax imposed the statute of limitations in 26 U.S.C. § 6511(a). See id.

A. Debtor's Tax History

In 1985, the debtor was under investigation by the United States Attorney's Office. See Brief of Appellee ("Appellee's Br.") at 3. Pransky decided not to file any tax returns during the pending investigation, rather the debtor's attorney submitted monetary remittances to the Internal Revenue Service on his behalf. See id. at 4-5. Each of these remittances was accompanied by a letter from the debtor's attorney stating that the money was "to be applied to the account of the captioned taxpayers for any income tax liability they may have for the year." See Pransky, 245 B.R. at 480. In April of 1985, the debtor filed a timely Form 4868 extension request and an estimated payment of $9,500 for the 1984 tax year. See id. The new deadline for the 1984 taxes became August 15, 1985. See id. On April 17, 1986, Pransky's attorney sent a remittance to the IRS in the amount of $40,000 for the 1984 tax year. See id. Additionally, $4,000 was withheld from Pransky's wages during 1984. See id. For the 1985 tax year, Pransky submitted a payment of $20,000 along with a Form 4868 extension request on April 15, 1986. See id. at 481. The new deadline for filing of the 1985 tax return became October 15, 1986, and Pransky forwarded a remittance to the IRS in the amount of $150,000, on July 8, 1987, and the debtor's employer withheld an additional $35,000 from his wages for 1985. See id. The IRS also received a remittance on July 8, 1987 in the amount of $315,000 toward the debtor's tax liability for 1986. *fn1 See id. In addition, the debtor's employer withheld $50,000 for that year. See id. On April 21, 1998, Pransky remitted $9,500 toward his liability for 1987 and his employer withheld $1,564. See id.

The debtor finally filed returns for 1984, 1985, and 1986 on December 11, 1991, and filed his return for 1987 on July 20, 1992. See id. at 480. The returns reflected an overpayment of the taxes actually due for the 1984 and 1985 tax years. See id. at 481. Indeed IRS transcripts indicate an overpayment in the amount of $27,437.97 for 1984, and an overpayment in the amount of $31,697 for the 1985 tax year. See id. The debtor sought to apply these overpayments toward the taxes he owed for 1986 and 1987. See id. The IRS treated the credits as refund requests, and disallowed the 1984 and 1985 requests on February 20, 1992, and March 9, 1992 respectively. See id. The IRS determined the refund requests were time barred under the statute of limitations in 26 U.S.C. § 6511(a), resulting in the stated underpayments. See id.

According to the IRS Certificate of Assessments and Payments, Pransky is current on his tax liability for 1984 through 1986, but the 1987 account has an outstanding balance of $144,874.74. See id. On February 27, 1997, during the course of Pransky's voluntary bankruptcy proceeding, the IRS filed its proof of claim in the amount of $131,237.02 for the balance of the 1987 taxes. See id. The amount reflected a balance of $2,183.28 in taxes, $34,650.15 in penalties, and $94,403.59 in interest. See id. On April 7, 1998, Pransky instituted the underlying adversary proceeding "seeking a determination of his federal income tax liability for the taxable years 1984 through 1987." Plaintiff's Complaint ("Pl.'s Compl.") ¶ 1.

B. The Bankruptcy Court's Decision

Pransky and the Internal Revenue Service both filed motions for summary judgment on the issue of the application of the statute of limitations in 26 U.S.C. § 6511(a). *fn2 See id. at 480. The debtor claimed he was entitled to recover the funds remitted to the IRS for the 1984 and 1985 tax years because they were deposits submitted to prevent the assessment of interest and penalties until he filed his official tax returns. See id. at 481. Pransky argued that the statute of limitations in 26 U.S.C. § 6511(a) did not operate to bar his suit because the limitations time frame did not begin to run until he filed his tax returns in 1991 and 1992. See id. Conversely, the IRS argued that Pransky's failure to apply for a refund by filing timely tax returns, pursuant to § 6511(a), was a bar to the Bankruptcy Court's jurisdiction to determine the validity of the government's proof of claim to the extent that it involved 1984 and 1985. See id.

The Bankruptcy Court noted that both parties agreed upon the material facts of the case and asserted jurisdiction pursuant to 11 U.S.C. § 505(a)(1), which incorporates the statute of limitations in § 6511(a). See id. at 482. The Court below indicated that the filing of a claim for refund was governed by 26 U.S.C. §§ 6511(a) and 7422(a). *fn3 See id. The outcome of the motions depended upon the characterization of Pransky's remittances as either deposits or payments; if the remittances were payments, then Pransky's claim for refund would be time barred under § 6511(a). See id.

The Bankruptcy Court examined the law regarding whether a remittance constitutes a payment or a deposit, noting that the Court of Appeals for the Third Circuit has rejected a per se rule for classifying such remittances as deposits. See id. at 483-84 (citing Fortugno v. Comm'r Internal Revenue, 353 F.2d 429, 435 (3d. Cir. 1965)). The Court below determined there must first be an "assessment or an acquiescence in the proposed deficiency before a remittance can be deemed a payment for purposes of § 6511," and that the debtor did not have a determined liability until after the filing of his tax returns in 1991 and 1992. Pransky, 245 B.R. at 484, 485. The Bankruptcy Court held that Pransky's remittances were deposits in the nature of a cash bond, thus the statute of limitations contained in § 6511(a) did not bar Pransky's adversary proceeding. See id. at 485. The Bankruptcy Court was unpersuaded by the IRS's treatment of the remittances as advance tax payments, and its contention that an express agreement between the taxpayer and the IRS was required for a remittance to be treated as a deposit. See id. at 485. The Court below also found that the remittances did not commit Pransky to any defined tax liability, because the correspondence which accompanied those remittances established the debtor's intent to submit them as deposits. See id. Finally, the Bankruptcy Court sustained the imposition of delinquency penalties because the debtor failed to timely submit the remittances in question. See id. at 486.

II. DISCUSSION

A. Standard of ...

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